Business interruption will also remain a key risk for 2021, especially for insurers that have non-standard policy wordings, advises ratings agency

The UK insurance market will demonstrate a “divergence” for 2021, as the London Market sector outlook is poised for improvement over the year ahead while the regional insurance market is pipped to worsen, according to credit ratings agency Fitch Ratings.

Speaking at a webinar titled ‘Fitch’s Insurance Outlook 2021: The Bumpy Road Ahead’ – featuring as part of the firm’s virtual Annual Insurance Roadshow – Graham Coutts, senior director and head of EMEA reinsurance at Fitch Ratings, said that the overall global sector outlook was “mostly stable on the non-life side”, but that there is a “divergence in the two UK outlooks”.

He explained: “On the non-life side, we do have one lone improving outlook and that’s for the London Market and that’s really because the pricing environment in the London Market is where we’re seeing the most improvement and the normalisation of claims in 2021 versus 2020, where we saw a lot of pandemic-related claims, should see an improvement, particularly on the pandemic side of things.

“We can contrast that with the regional market. In the regional market, there was actually a one-off benefit of reduced motor loss frequency throughout the lockdowns and that’s unlikely to be repeated, at least not to such a large extent in 2021.

“And there’s other pressures on the non-life regional market, so regulatory changes, weak pricing, high claims inflation from Brexit and that all means that the sector outlook is worsening for 2021 for the regional market.”

Fitch Ratings’s sector outlooks used 2020 as a baseline in order to predict fundamental trends for the year ahead.

“On the non-life side, the majority [of markets] are on the stable outlook,” Coutts added.

“The positive impact of normalising claims levels, rates increasing in certain key lines of business, but offset to some extent by those negative pressures from coronavirus on [premiums] and asset quality.”

Risks to watch

In terms of the risks that should be on insurers’ radars for 2021, Coutts listed ultra-low interest rates, climate change, environmental, social and governance factors, credit risk, digital disruption, pricing and competition costs as well as the Solvency II review as key considerations.

However, he also predicts that pandemic-related claims will still thwart the industry this year, including business interruption (BI) claims.

He said: “One of the key areas here, still, is business interruption. We don’t think this is going to be a systemic risk anymore, we’re not really expecting a retroactive liability for insurers, but we do think there’s still a significant risk for idiosyncratic losses.

“So, if you have any non-standard policy wordings, that’s going to be important to monitor and understand how that’s going to impact non-life insurers going forward.”

Year of recovery?

Meanwhile, Olga Tschekassin, an economist at reinsurer Swiss Re, pipped 2021 as the “year of recovery” from the Covid-19 pandemic, however this will still be fragile, uneven and depend on fiscal stimulus, she said, especially as the UK experienced the “deepest [gross domestic product] contraction”.

Although the year has started with a “double dip recession”, Tschekassin predicted that recovery from the pandemic will “build steam” from quarter two onwards as the continued vaccine rollout will enable quicker economic and social normalisation.

Risks that may threaten this, however, include if the vaccine is found to be ineffective against the newly discovered strains of the virus, or if support measures – such as those provided by the government – are prematurely withdrawn.

Tschekassin also touched on economic resilience, which she defined as the ability of countries to bounce back from economic shocks. Globally, this has dropped by around 20% as a result of the Covid-19 pandemic, she said.

In terms of individual sector recovery, she believes the manufacturing industry will recover well due to the “pent up demand” for goods. Where people have been in lockdown, they have not been spending their money on goods, yet often have more cash to spend due to saving on commuting costs, for example – she predicts shopping for good will therefore increase and benefit the sector as a whole.

On the flip side, the service sector may not bounce back so strongly – people cannot get two haircuts once out of lockdown, she explained.

Also speaking at the webinar were Federico Faccio and Willem Loots, both senior directors for EMEA in the insurance team at Fitch Ratings.